Business Studies Unit 1


What is a business?

A business is an organisation.        The purpose of a business is to produce and provide customers with goods and services to meet their needs. 

What does a business need to think about when setting up?

  • Is there a business opportunity?
  • How will the business be financed?
  • What is required to start the business?
  • What legal aspects have to be considered?
  • What products and/or services will you sell?
  • Who will you sell these to? 

What businesses do:

1. Buy from suppliers 

2. Produce goods using raw materials, labour and equipment

3. Sell to customers/consumers

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What is a market?

Market: where buyers and sellers meet to exchange goods and services. 

It is essential for businesses to understand customer needs, as customers are the main input of money into the business. 

Some common customer needs are: good product quality, good product range, a fair price, convenience and good customer service

One way to do this is through market research. This can tell a business:

  • what features customers want
  • how much they are willing to pay
  • where they shop
  • what age and gender they are
  • who the main competitors are
  • if the market is growing or shrinking
  • what they are looking for from a certian product
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Primary and Secondary Research

Primary research: the gathering of new information for a specific purpose, called primary data, that has not been collected before. 

Examples: focus groups, questionnaires, surveys, observations

Advantages: more accurate, up to date, specific to needs, good for qualitative data

Secondary research: the gathering of information that has already been collected, called secondary data

Examples: sales data, government statistics, reports, websites, newspapers

Advantages: more general, cheaper, less time-consuming, good for quantitative data

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Qualitative and Quantitative data

Qualitative data: information about opinions, judgements and attitudes (focuses on the quality of the information). 

Example: a focus group where a few people are interviewed in detail. 

Quantitative: data that can be expressed as numbers and statistically analysed (focuses on a big amount of information). 

Example: a short survey of 10,000 people with basic questions.

Primary research = field research

Secondary research = desk research 

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What is market segmentation?

A market segment is a group of buyers with similar characteristics and buying habits. 

A market can be segmented in many different ways: age, gender, income, lifestyle etc.

Businesses can analyse customer buying habits through:

  • finding information about customers
  • using their own experience
  • looking at existing businesses
  • trying out competitors products
  • observations and surveys
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What is market mapping?

Segmentation of a market allows a business to:

  • meet specific customer needs
  • differentiate their products
  • focus on specific groups of customers
  • develop a unique brand image
  • build close customer relationships

Market map: shows the position of product based on common factors, which allows businesses to compare competitors 

Image result for market map Here is an example of a market map of chocolates. 

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How can a business compete?

Businesses can judge and analyse the strengths and weaknesses of competitors in order to improve its own business

Instead of competing head to head e.g. on price, businesses can differentiate and have strengths different to competitors. 

Some ways to compete are:

  • wider product range
  • better design
  • higher quality
  • better product features
  • better customer service (after sales service included)
  • stronger brand image

Branding: something customers are familiar with and can identify with, usually more trusted than unknown products. 

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What is added value?

Added value: an increased worth that a business creates for a product. It is the difference between what a business pays its suppliers and the price is it able to charge for the product. 

Added value is important because it goes towards the costs, and can eventually increase profits. 

How can businesses add value?

  • branding
  • better design
  • improved quality
  • USP
  • more convenience 
  • improved customer service

A lot of businesses use a variety of ways to add value to their product. 

Added value = price of product - cost of production

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What is franchising?

Franchise: the right given by one business to another to sell goods or services using its name

Franchisor: the business that sells the rights.

Franchisee: a business that agrees to manufacture, distribute or provide a branded product, under liscence by a franchisor. 

What does the franchisee buy?

  • an established brand name
  • training
  • equipment
  • support
  • access to goods and services
  • advertising and promotion
  • operation in an exclusive area
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Benefits and drawbacks - franchisee


  • expensive marketing costs already covered
  • brand image/reputation already established
  • access to already improved products
  • higher chance of survival
  • specific training and support provided (sometimes finanacial support)
  • connections with suppliers 
  • pre-existing customers


  • start up costs can be expensive
  • royalty payments - loss of profits
  • complicated application process
  • lack of autonomy and control
  • limited flexibility with decisions
  • failure from franchisor has knock on effect 
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Benefits and drawbacks - franchisor


  • cost effective growth, that is relatively quick
  • franchisee owns the business and so will be more motivated
  • once established, business brings in loyalty payment with no work
  • costless advertising/awareness
  • higher demand of suppliers encourages better bulk deals


  • loss of ownership
  • failure of franchisee has knock on effect
  • co-operation is essentail but not always available
  • confidentiality loss
  • loss of flexibility when making decisions
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Importance of location

Location is very important when setting up a business. 

It can determine the success of a business. 

However it is more important to some business than others. For example a factory that has to distribute all around the country could be placed almost anywhere. 

Some factors involved when choosing a location:

- proximity to competitors

- busyness (passing trade)

- access (parking etc)

- cost of locating there

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What is enterprise?

Entrepreneur: a person who owns and runs their own business and takes risks.

Enterprise: the initial spark and idea for a business and the willingness by an individual to show initiative, take risks and undertake a new venture. 

Enterprises: another word for businesses. 

The 3 main skills an entrepreneur must have are:

- risk taking 

- showing initiative

- willingness to undertake new ventures

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Why do entrepreneurs ask questions?

Entrepreneurs must ask questions to:

  • identify business objectives
  • develop aspects of the business plan
  • make important decisions
  • identify potential problems

They should ask what/what if, where, who, when, why and how questions e.g.

What if my business loses money?

Where can I get advice?

Who will be my main target audience?

When could I open the business?

Why do I want to change this?

How do I meet customer needs?

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Invention and Innovation

Invention: the discovery of new processes and potential for new products, typically after research.

Innovation: the process of transforming inventions into products that can be sold to customers. 

Risk involved:

  • expensive
  • time-consuming
  • not guaranteed success
  • failure or products in market
  • competitors copying ideas
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How can business ideas be protected?

Patents: the right of ownership of an invention, design or process given for 20 years. 

Copyrights: legal ownership of material such as books, music and films and can last for a long time.

Trademarks: ownership of a logo, symbol, sign or other features so they cannot be copied. 

However all of these are expensive to obtain. They also do not stop people from copying things, and taking them to court can be expensive, stressful and time-consuming. 

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Thinking creatively

The success of a lot of businesses depends on the owners ability to come up with new and unique ideas to allow them to compete and differentiate themselves. In other words, to be creative

Thinking creatively allows a business to have a competitve advantage which is likely to make them stand out more, and therefore gain more customers. 

By thinking creatively, a business can produce competitive advantages such as:

  • having better products
  • finding unique ideas and products
  • achieveing cheaper and more efficient production
  • providing improved customer service
  • identifying new opportunities
  • using new technology that makes the business unique
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Deliberate creativity & Blue skies thinking

Deliberate creativity: the intentional creation of new ideas through recognised and accepted techniques. It is used for coming up with ideas deliverately rather than accidentally. 

These techniques could include: creating lists, mind mapping etc. 

Blue skies thinking: coming up with as many ideas as possible to solve a problem or issue. The aim to exhaust the participants ideas and then analyse them at a later stage. 

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Lateral thinking

Lateral thinking: thinking differently to try and find new and unexpected ideas. 

An example of lateral thinking is Bono's 6 thinking hats, that should be used one at a time to address a question or problem. It can give different perspectives on an issue and allow a business to work a solution to fit all of these perspectives. 

White: thinking about the facts that are already known about the problem. 

Yellow: thnking positively about the problem (what could go right).

Black: thinking negatively about the problem (what could go wrong). 

Blue: thinking about the thinking that has already been done and whether it is useful or not. 

Green: thinking creatively about how to get around the problem. 

Red: thinking about emotions and gut feelings on a problem. 

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Calculated risk

Calculated risk: the probability of a negative event occuring. It involves weighing up the risks and rewards to allow businesses to take calculated risks. 

A calculated risk is achieved through research, and understanding the risk in order to reduce the possibility of it happening. e.g. 1 in 3 change of business failing. 

Making mistakes: this is an important part of running a business, as it allows entrepreneurs to see which areas are failing, and what needs to be improved. Through making mistakes they will also become better at calculating risk. 

Risk can also be calculated by stating the upsides and downsides of an idea, and scoring each one out of 5 (1 being very important and 5 being not important), and the side with the lowest score has the most importance. Therefore is downsides has the lowest score and most importance then there is possible evidence to suggest that the idea in question is not a good one, as it has a lot of important downsides. 

However, calculated risk can be difficult as there are so many unknowns, especially for new businesses. 

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Enterprise skills

There are many skills involved with being a successful entrepreneur. These include: 

  • Planning - identifying a plan of action for the business, to avoid unexpcted problems and stress. 
  • Drive - being hardworking and motivated to achieve success. 
  • Thinking ahead - having the foresight to identify potential problems and be realistic about the future of the business. 
  • Determination - being resilient when things go wrong, and not giving up when things don't always go to plan. 
  • Seeing opportunities - having the creativity and imagination to do things differently, to allow your business to stand out. 

This mneumonic can be used to remember these: Please Don't Trip Down Stairs 

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Mind maps

Mind maps can be used in all types of thinking, as it allows an entrepreneur to get their ideas onto paper, and group them all accordingly. However, it is usually used in blue skies thinking. 

It allows them to visualise all the options, and choose which is the best and what has potential etc. 

A mind map is made by putting one idea or problem in the centre of the page, and writing other words or ideas around it, possibly under sub-headings.


:  Image result for marketing mix mind map (

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Entrepreneurial qualities

Not all entrepreneurs will have all the qualities needed. However, they may have a few, and qualities will vary from person to person. 

Planning: identifying a plan of action 

Initiative: being pro-active and getting jobs done

Taking risks: willingness to take risks even when there is a possibilty of problems

Determination and drive: not giving up and being resilient, being motivated and hardworking

Making decisions: good judgement and making fast, logical decisions

Persuasion: talking to customers, suppliers, banks etc, they must believe in you

Leadership: must employ and lead others, set a good example

Luck: there is always luck involved with business

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Financial & Non-financial objectives

All businesses have obejctives - whether these are financial (in terms of money) or non-financial (in terms of personal satisfaction). 


  • suvival 
  • profit and income
  • wealth
  • financial security


  • personal satisfaction
  • independence and control
  • helping others
  • challenge
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Revenues, costs & profits

Price: the amount of money customers have to give up to acquire a product.

Cost: the amount of money it takes to produce the product. 

  • Total costs = fixed costs + variable costs

Revenue/turnover: income recieved from selling goods or services over a period of time. 

  • Total revenue = price x quantity sold

Profit: the amount of money gained after costs have been paid

  • Profit (or loss) = total revenue - total costs

Fixed costs: do not vary with output e.g. rent, salaries etc.

Variable costs: do vary with output e.g. raw materials, labour costs etc. 

  • Total variable costs = variable costs per unit x output
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Profit / Loss

Profit occurs when revenues are greater than total costs. Loss occurs when revenues are less than total costs

  • Profit/Loss = total revenue - total costs

Profit is an objective for many businesses as it allows them to: survive, reinvest for expansion, provide security and savings, reward employees and generate wealth. 

However, making a loss could be disasterous for a business, as they could be: unable to repay loans, unable to pay bills, experiencing cash flow problems and unable to survive. 

Some ways to increase profits include:

  • lower variable costs
  • lower fixed costs
  • increase sales price
  • increase quantity of sales
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Cash flow

Cash flow: the money flowing into and out of a business on a day to day basis. 

Cash flow forecast: predicts how money will through into and out of a business over time. This can help a business to identify possible future cash flow problems. 

Example: (net cash flow is the overall change in cash in that time period)

Image result for cash flow forecast diagram basic

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What factors affect cash flow?

There are many factors that can affect cash flow:

  • credit terms changing 
  • change in stock levels
  • change in sales revenue / demand
  • change in costs 
  • seasonality changes e.g. sun cream
  • business expansion or contraction

Cash flow problems can lead to insolvency as a business is unable to:

  • pay its debts
  • repay bank loans
  • pay wages to employees
  • buy raw materials and produce products to sell
  • promote the business

A business could be profitable, but cash flow problems can sitll lead to insolvency. It is all to do with when money comes into and goes out of a business. 

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What is a business plan?

Business plan: a plan for the development of a business giving forecasts of items such as sales, costs and cash flow. 

It can help an owner to think about all the different aspects of their business which allows them to organise it better. They can consider the market research they need to do, the problems they may encounter based on their forecasts and anything else that needs more work. It will also be used when applying for a loan at a bank as the bank will need proof that your business has a high chance of being successful. 

A business plan should include:

  • Overview of the business - name, location, owners, legal stuff etc. 
  • Requirements - equipment, premises, money etc.
  • Personnel - background information on the key personnel in the business etc.
  • The product - market research, tested?, suppliers, how will be produced etc. 
  • Advertising - adveritisng information, costs, plan for failure? etc.
  • Objectives - what does the business want to achieve etc.
  • Forecasts - cash flow, finance, sales revenue & figures etc.
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What is a cash flow statement?

A cash flow forecast is a prediction of the cash flow in and out of your business.

This is important as it helps to identify potential problems, it will help when applying for a loan and will allow you to prepare for payments. 

A cash flow statement is like a cash flow forecast but is done after the time period with the actual figures.

This important as it can show your cash flow situation, it can help with investors and it also shows how accurate your forecasting is and what needs to change for the next forecast. 

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What are long term sources of finance?

Long terms sources of finance include:

  • Share capital - investors who buy shares in the business (only used by limited companies)
  • Venture capitalists - like share capital but with larger amounts of money
  • Loans - loaned off the bank with a monthly interest rate, also includes mortgages
  • Grants - money given from a charity in hope that the business will contribute to the community
  • Personal savings - this is money that the owner has saved over a period of time
  • Leasing - renting equipment, premises or vehicles instead of buying them
  • Retained profit - usually longer existing businesses

Security (collateral): This is when money is borrowed from a bank, and something needs to be put down as security that can be taken if you are unable to pay the loan back. For example, in a mortgage, if you do not pay it back, the property will be taken from you. 

Banks have an incentive to loan money which is interest. This is essentially the cost of borrowing. 

Dividend: A share of the profits of a business given to shareholders as a reward. 

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What are short term sources of finance?

Some short term sources of finance include:

  • Trade credit - arrangement between businesses and suppliers to pay for goods at a later date
  • Overdraft - go over a bank limit for a small amount, usually paid back with interest
  • Factoring - factors will pay around 90%, then recieve the full amount themselves at a later date
  • Delayed payment - reducing cash outflow for as long as possible = bad reputation
  • Credit cards - short term borrowing, paid back at the end of a month

Short terms sources of finance are usually used to solve unexpected small problems, usually associated with cash flow. 

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Customer focus

Businesses must understand customers and meet their needs if they want to attract people to buy their products. There are 3 steps to being customer focused:

1. Identifying needs: understanding what customers want from product/services

2. Anticipating needs: the best businesses will identify needs in advance to give them a competitive advantage. This is especially important in markets where trends change all the time

3. Meeting customer needs: actually provide what customers want, and so altering the business and what it produced so it fits customers

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The marketing mix

The marketing mix is a planning and organising tool for a business, usually the 4 P's

Product: meet the needs of customers, correct features, successful businesses will differentiate their products

Price: the price of a product must reflect what customers are willing to pay, and must reflect the product itself

Promotion: communication between business and customer making the customer aware of a product and making them want to buy it e.g. advertising, sponsorship etc. 

Place: the way in which a product is distributed, so how it gets from producer to customer e.g. online, or in store. 

All of these must be coherent and balanced for it to be a successful tactic. Usually one is more important dpeending on the business. 

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Sole traders & Private limited companies

Sole trader: the only owner of a business

  • has unlimited liability
  • more risk involved
  • 100% control over the business
  • recieve 100% of the profits
  • do not have to publish any accounts and so have more privacy. 

Private limited companies: registered company owned by shareholders

  • has limited liability
  • reduced risk 
  • less control depending on amount of shares
  • profits are shared between shareholders
  • account filed with Companies House
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Limited & Unlimited liability

Limited liability: When shareholders and owners of a business are not personally responsible/liable for the debts of a business. Therefore the most they can lose is what they invested in the business. 

Unlimited liability: A legal obligation on the owner of a business to settle all debts of the business. In law, there is no distinction between the business and the owner. 

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Legal requirements - start up

Businesses have to obey legal requirements:

  • so the government can keep a track of business activity
  • so taxes can be collected
  • to protect businesses from illegal activity/illegal business practices

Legal requirements on a small business include:

- Register and trade under a unique name (Ltd means limited company)

- Keep records of sales, purchases and names of businesses they have worked with

- Register with Her Majesty's Revenue & Customs (HMRC) as they are responsible for collecting taxes

- Pay the appropriate level of taxes

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What are the taxes on small businesses?

Value Added Tax (VAT) - a tax on the value of sales of the business. Businesses that sell more than a certain amount have to register to pay VAT. It it collected by the business and then sent to the government. This does not have to paid on certain things e.g. children clothes. 

Income Tax - a tax on the income earned by workers and sole traders. Workers income tax is usually dealt with by the business.

National Insurance Contributions (NIC) - a tax on the earnings of workers and sole traders linked to state benefits (pensions and benefits).

Corporation Tax - a tax paid by limited companies on the profits of the company. In contrast, sole traders pay income on their profits. 

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Customer Satisfaction

Customer satisfaction - a measure of how much a business or its products meet customers expectations. 

Good customer service includes:

  • Dispatching orders quickly and being 100% accurate
  • Offering excellent after-sales service
  • Being convenient, friendly and polite
  • Providing a personal service
  • Responding immediately to complaints 

Benefits of good customer satisfaction: repeat purchase, customer loyalty, postitive brand image, premium pricing, good reputation, differentiate and have USP.

Repeat Purchase happens through: cheaper prices, more convenient, better offers, good customer relationships. 

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Recruitment Process & Laws

1. Draw up recruitment documents (job adverts, descriptions etc)

2. Recieve applications (CV's, application forms etc)

3. Shortlisting

4. Selection (involves interviews and assessments)

5. Hiring & Training

Employers must not discriminate on basis of sex, age, gender or disability. Employees are protected from unfair dismissal. Employees cannot be expected to work over a certain amount of hours. 

Candidates should have the right SKILLS and the right ATTITUDE for the job. They should be hard working, honest, punctual and enthusiastic. 

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Why is motivation important?

Motivation: in work,the desire to complete a task and meet the needs of the business consistently. 

Motivation is important in business at it allows employers to encourage their workers to do their best and make the business as successful as possible. It can lead workers to be more productive. 

Motivation of staff can be achieved by:

  • paying fair and competitive wages
  • provide good working conditions
  • delegate power and responsibility
  • provide possible fringe benefits
  • provide training and staff development
  • be understanding and consistent with treatment of staff
  • keep them informed
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Supply, Demand & Commodities

Supply: the amount of products sellfers are willing and able to offer at any given price.

Demand: the amount of products customers are willing and able to buy at any given price. 

Commodities: raw materials such as coal, oil etc. 

The effect of supply and demand on commodity prices:

Demand: High          Supply: Low         SHORTAGE - prices rise

Demand: Low          Supply: High         SURPLUS - prices fall

Prices are determined on where supply and demand are roughly equal (at equilibrium).

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What is the affect of a change in commodity prices

How much a business is affected by raw material and energy costs depends on:

- how much the costs rise by

- what proportion these costs are of their total costs

A business has two options when facing a rise in price. 

1. Absorb the extra costs so prices don't go up for customers, leads to decrease in profits. 

2. Pass on the costs to customers (put the prices up) so they can keep profit levels the same. 

Prices of commodities usually change a lot more than costs of goods because customers like prices to stay the same. Also, commodities can change frequently e.g. oil spills leads to a shortage of oil and so prices rise. 

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What is an interest rate?

Interest rate: the percentage reward or payment over a period of time that is given to savers or paid by borrowers (cost of borrowing).

An entrepreneur may have to take out a loan or an overdraft, which they will have to pay back with interest, meaning they have to pay back more money than they borrowed.

Fixed: do not change over the life of a loan.

Variable: they can change and so a business may have to pay more or less depending on the rate. This type of interest involves more risk as it is unknown.

Most interest rates are set by The Bank of England (TBOE). This is a central bank to other bankers, that has a meeting every month to decide the interest rates they offer. Generally, if TBOE rates rise, the other smaller banks will and visa versa.

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Effects of a changing interest rate

A RISE in interest rates INCREASES the cost of borrowing.

  • Businesses with variable loans may struggle to repay them.
  • Small businesses less likely to borrow money to start up or expand.
  • Customers are less likely to spend money and so consumer spending falls.

A FALL in interest rates DECREASES the cost of borrowing.

  • Businesses will have more money to spend and cash flow will imrpove.
  • Small businesses can borrow money to start up or expand.
  • Customers are more likely to spend more and so consumer spending rises.
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What is an exchange rate?

Exchange rate: the price of buying a foreign currency. It tells you how much of a currency you will get for every British pound.

Imports: goods and services bought from abroad (money out).

Exports: goods and services sold abroad (money in).

SPICED                           Strong Pound Imports Cheaper Exports Dearer

Pound --> Something else = multiply pounds by exchange rate

Something else --> Pounds = divide something else by exchange rate

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Effects of a changing exchange rate

Rise in the value of the pound:

  • Bad for UK exporters - price of exports rise - sales fall
  • Bad for UK tourism - prices more expensive to foreigners - tourism falls
  • Bad for UK businesses - imports cheaper - fewer UK goods bought
  • Good for UK importers of materials - imports cheaper - costs fall

Fall in the value of the pound:

  • Good for UK exporters of goods - price of exports falls - sales increase
  • Good for UK tourism - prices cheaper to foreigners - tourisms increases
  • Good for UK businesses - imports more expensive - more UK goods bought
  • Bad for UK importers of materials - imports more expensive - costs rise
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The Business Cycle

Image result for business cycle diagram (

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Boom/Expansion & Downturn/Recession

In a boom:

  • consumer and business more confident
  • consumers borrow and spend more
  • businesses take on more employees
  • businesses invest and expand

In a recession:

  • consumer and business confidence low
  • consumers borrow and spend less
  • businesses may lose employees to lower costs
  • businesses save and cut back spending
  • businesses may experience cash flow problems
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Stakeholder: an individual or a group which has an interest in and is affected by the activities of a business. They have an interest in how the business is run and if it is successful or not.

Some stakeholders include:

  • Owners
  • Managers
  • Workers
  • Customers
  • Competitors
  • Suppliers
  • Government
  • The local community

However, as there is many different stakeholders in a business, there is always stakeholder conflicts. This is due to conflicting interests as different people want different things for a business and want different things from it.

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Naadiya Mayet


Yassss Christina!! These are so good!! :)

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